Favoured by regulation and tax incentives, annuities have become by far the dominant post-retirement solution in Europe.
This bias towards substantial annuitisation of retirement savings early in retirement is, however, not justified, argue Raimond Maurer and Barbara Somova of Goethe University in Germany in a study undertaken for the European Fund and Asset Management Association (EFAMA).
“In an environment where individuals can expect to live 20 to 30 years in retirement, forcing to buy an annuity at the age of 65 is out of date,” said EFAMA director general Peter De Proft at a function in Brussels marking the launch of the report: Rethinking retirement income strategies – how can we secure better outcomes for future retirees.
“Individuals should be allowed to select more profitable investment products,” continued Proft.
“We hope that policymakers will take this finding seriously and agree to support on equal terms both annuities and innovative products that use effective portfolio management techniques.”
In the EFAMA study, Maurer and Somova set out to demonstrate that the best investment strategy in retirement is to hold a significant proportion of pension assets in equity early on and to switch progressively to bond holdings and annuities over time.
“The benefits of investment diversification extend well beyond normal retirement age,” said EFAMA president Mathias Bauer.
“By keeping a balanced asset allocation of their pension savings for an extended period after retirement, individuals can expect to achieve substantially higher retirement income, at a comparatively low risk”.
According to the study’s authors, 70 percent of individuals can expect to enjoy up to a third higher consumption level if they hold equity at the beginning of retirement and gradually switch to annuities over time rather than annuitise all their wealth at the age of 65. Their conclusion was based on simulations of consumption levels under different financial market conditions.
Against this background, Bauer stressed: “The European investment management industry is fully committed to playing its role in assisting households by developing innovative alternatives to annuities, capable of converting pension savings into a recurrent income stream after retirement.”
EFAMA called on European regulators to reassess their bias towards annuities and place alternatives on an equal competitive footing with annuities. At the very least EFAMA wants the upper age limit for compulsory annuitisation should be increased toward 85. In the UK, for instance, retirees are currently required to buy an annuity by the age of 75.
EFAMA represents 24 member associations and 43 corporate members which had combined assets under management of about €14 trillion ($18 trillion) at the end of 2008.